Somewhat disappointingly, although there have been some high visibility transactions in 2007, many prospective companies remain untapped. As one who has been on the buy side of a few private transactions, I can attest that owners, temperamentally imbued with an unrealistic perception of the value of their company, perhaps reinforced by the exuberance of 2007, turned off a large number of funds. In most cases, unless owners were confident that they had fully ripped off the investor of any remnant of value, no transaction seemed to get done. Funds did not do themselves any favours either, by queuing up for almost any investment idea.
Moreover, even after transactions did take place, there has sometimes been resistance to even the most well-intentioned management interventions. A consequence of this is that, though media attention has focused on the deals that did happen, in a far larger number of potential transactions through which the economy could have benefited, governance and expertise were turned away by the well-established players. Hopefully, the frozen market for capital will induce more Indian SMEs to open their doors enthusiastically to PE, which can in turn play their role towards efficient capital allocation and improved governance.
...Finally and most critically, this focus on governance combined with the distilled experience of external investors can significantly facilitate further capital raising including listing, most of which value will accrue to the entrepreneur. Consequently, if the present crisis in liquidity can accelerate the depth of the private market, one can look forward, over the next few years, to a new wave of Indian companies, heirs to icons such as Fedex, Apple and Oracle, which were founded on private funds. These investments will soon come to the top table of the Indian corporate world, thanks to a sharper focus on disciplined management. Were that to happen, the dark night of the capital markets may yet have a silver lining.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.